UK has exited period of heightened risk, FPC says

Britain’s financial system has exited from the period of heightened risk aversion and balance sheet repair which followed the financial crisis, the Financial Policy Committee said in its December report.

Nevertheless, the global macroeconomic backdrop remains challenging; risks related to Greece have fallen from the acute levels seen in the July 2015 report, but they have been replaced by downside risks to growth in emerging economies, the financial stability report said.

Even so, the amount of so-called Tier 1 capital needed by banks was judged to be 11% of their risk-weighted assets, which was less than the 13% held in aggregate by the major banks in September 2015, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said in a research report sent to clients.

Prices for financial assets around the world remain vulnerable to a “crystallisation” of those risks in emerging markets, the FPC said in its twice-yearly assessment.

Furthermore, the low level of interest rates, which may be the result of “unusually compressed” term premium, means they remain vulnerable to a sharp increase in market interest rates, it added.

According to the FPC, the impact of such a sharp increase could be made worse, at least temporarily, by fragile market liquidity.

Among the domestic risks to keep tabs on, the FPC highlighted strengthening buy-to-let and commercial real estate activity and the UK’s historically high current account deficit.

Increase in counter-cyclical buffer may be on the cards

To take note of, the FPC decided to keep its counter-cyclical capital buffer rate at 0% but said it would carefully review it in March 2016.

"During periods after the recovery and repair phase that typically follows a financial stress, but before the risks facing the system have become elevated, the Committee currently expects the counter-cyclical capital buffer to be in the region of 1% of risk-weighted assets," the FPC added.

"By moving early, the FPC expects to be able to vary the countercyclical capital buffer more gradually."

That suggests the FPC could raise the CCB as soon as its next meeting in March, Tombs said.